The dollar fell broadly on Monday, hitting a six-week low against the yen after dovish comments from a U.S. Federal Reserve official reinforced the view that U.S. interest rates would stay low for a long time.
Selling in the dollar came as gold prices hit a record high, underlining demand for higher-yielding assets. Expectations a low Fed funds rate would limit returns on many U.S. investments prompted some investors to diversify out of the currency.
The euro was supported after a key survey showed the euro zone's service sector grew at its fastest pace in two years in November, suggesting an economic recovery will continue in the fourth quarter, albeit at a slower rate.
St. Louis Federal Reserve President James Bullard said on Sunday the Fed should keep alive its mortgage-related assets purchase programme beyond a planned end date to help stimulate the economy.
Policy expectations last night certainly hurt the dollar, said Geoffrey Yu, currency strategist at UBS in London.
Bullard has raised the prospect that U.S. monetary policy will stay easy for an extended period of time.
He added that the view that loose U.S. monetary policy would further weaken the dollar was prompting some investors to buy other investments, including gold.
Expectations have been growing that the Fed funds rate will stay essentially at zero well into 2010 as rates in other countries rise, and this has contributed to the dollar's steady decline since March.
At 1253 GMT, the euro EUR= was up 0.7 percent at $1.4970 EUR=. Against a basket of currencies, the dollar .DXY dropped 0.8 percent to 75.086, off a two-week high of 75.879 hit on Friday.
Moves were exacerbated by thin liquidity with Tokyo markets shut and ahead of the U.S. Thanksgiving holiday on Thursday.
Against the yen, the dollar fell 0.1 percent to 88.83 yen JPY=, having earlier hit a six-week low of 88.58 yen, according to Reuters data. The euro EURJPY=R rose 0.7 percent to 133.00 yen.
Gold prices XAU= jumped to a record high $1,167.45 per ounce. Demand for higher-risk assets increased, with European shares .FTEU3 rising 1.5 percent on the day while oil prices CLc1 rose 1.3 percent.
In the year to date, gold is up 33 percent while the dollar index is down 7.9 percent.
FOCUS ON FED MINUTES
Higher gold and oil prices boosted riskier commodity-linked currencies, with the Australian AUD=D4 and New Zealand NAD=D4 dollars each climbing 1 percent or more against their U.S. counterpart.
The U.S. dollar also fell 1.2 percent against the Canadian dollar to C$1.0581 CAD=D4.
As we look ahead divergence in central bank policy will be a key driver in FX markets - there are a lot of liquidity issues here. It's not just about interest rates, said Ned Rumpeltin, currency strategist at Nomura in London.
Analysts said there was a difference in tone between the Fed and the European Central Bank, with Bullard's remarks coming after ECB President Jean-Claude Trichet said on Friday that banks risked becoming addicted to easy money.
ECB Executive Board member Jose Manuel Gonzalez-Paramo was quoted as telling a newspaper at the weekend that the central bank believed interest rates are now appropriate, suggesting that policy may not have to be loosened further.
Further clues to Fed policy may be gleaned with Tuesday's release of minutes of the last Fed meeting.]